Tuesday, July 2, 2013

"Is 'Repression' Such a Bad Thing??" ...and... "Arab Spring Turns into Arab Winter"

Political repression?  Generally.
Interest rate repression?  Not really.

Below (in italics) are some comments that I made in a dialogue with an investor re QE tapering, Bernanke's QE program, rate repression, and how the Arab Spring turned Winter might impact energy investments......

I think that's exactly the plan! (referring to the Fed intentionally creating steepening conditions for the yield curve by tapering QE and at the same time keeping short rates low)  Steep yield curves are generally 'money trees' for banks....borrow low, lend high.  Pretty simple.  The Fed has to navigate a way out of QE that leaves banks strong, and a steep yield curve would certainly help on that front.

The whole point of rate repression was to drive real-interest rates to zero or negative.  Once accomplishing that, savers were no longer motivated to save as there was no real return on their savings!  And that's why I think Bernanke was actually more successful than people generally give him credit for...he kept the oil running through the economic engine and gave savers every reason to keep spending..which they've done!  Witness car sales, rebound in house prices, retailer strength, and even travel.  So now w/people revitalized (albeit at still relatively cautious levels) in terms of spending, the Fed sees the light at the end of the tunnel and knows it has to let nominal rates creep up. 

Now, the ratcheting up of rates that we witnessed the past few weeks was probably more abrupt than they wanted, but in the scheme of things, going from 1.5% USTsy 10s to 2.5% is not such a cataclysmic move!!  And now, with real rates higher (since inflation hasn't changed), savers might just actually lean more towards saving....and investors likewise will lean more towards investing. (ol' Econ 101).

With regard to Europe, as you say...different story altogether!  There's no momentum among Consumers...the banks are awfully sick....and their dependence on Arab oil makes them much more vulnerable to energy price shocks especially as the so-called Arab Spring turns into Arab Winter as evidenced in Egypt today.

I still think that one of the biggest risks to global market calm is another EZ crisis of significant magnitude.  Maybe that's why the Troika stepped up the heat on Greece....thinking that someone has to be made an example of in order for the others to continue to fall in line.....

Moving away from yield curves and financial repression, just a word on what many would argue has been political repression...namely, the current state of affairs in Egypt.

I mentioned in the comments above, that the Arab Spring has turned into an Arab Winter....implying that the move to democracy, that defined the tumult in several Arab countries last year and resulted in overthrown dictators, replaced by elected officials, is proving quite challenging and vulnerable to dismantling.  

Egypt is the country-de-jour, experiencing massive protests against the elected government of Morsi, and facing a military response if he's unable to resolve the demands of the mass protesters.     

The markets response has generally been to take up the price of oil on the notion that increased instability in the region is often associated with higher risks of oil supply disruptions.  The two charts below are noteworthy....one shows how XLE has outperformed WTI since late 2012, suggesting profit prospects not just from higher oil prices, but from other sources of income including the rapidly expanding US oil and gas finds.  The second shows XLE's move up on the recent Egypt turmoil.  With signs of global economic growth proving moderate at best, oil's price hike is more likely to be driven by geopolitical events like supply disruptions, more so than by demand driven factors.  In either case, US energy companies that are positioned to capitalize on monetizing home-grown energy, are likely to benefit.  We're watching closely....

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
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Additional Disclaimer: currently long many stocks/ETFs including XLE.  Positions may change at any time without notice.

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